5 Big Differences Between a Personal Loan and a Home Equity Loan

A personal loan and a home equity loan have some important qualities in common. With both types of financing, you can often borrow a large amount of money so you can use the loan to pay for very expensive purchases, to consolidate debt, or to improve your home. And both offer you the chance to get a lump sum deposited into your checking account so you can use the money for almost anything you want.

There are some important differences between a personal loan and a home equity loan, though, and you need to carefully consider them when you're deciding which one makes sense for your situation. Here are five of the biggest differences.

1. The application process

The process of applying for a personal loan is quick and easy. You can usually fill out an application online and often get approved and get your funds within the same business day. You'll need to provide basic financial information, but usually very limited documentation beyond proof of income.

Applying for a home equity loan requires a lot more effort. You'll often need a home appraisal and lots of details about your income and other debts. You may need to provide pay stubs and tax returns and bank statements. It can take anywhere from a few weeks to a few months to go through the entire application process and actually get your money.

2. The upfront costs

Home equity loans typically come with closing costs equal to 2% to 6% of the amount you're borrowing. Fees can include origination fees, appraisals and surveys, and document preparation costs.

Many personal loan lenders don't charge you any upfront costs. So you won't have to pay any money at the start to get your loan.

3. The amount you can borrow

Personal loan lenders have maximum and minimum borrowing requirements. Minimums could be as little as $500 or $1,000 and maximums as high as $100,000. Your loan limits will be based on lender policy and your income, along with what the lender thinks you can afford.

With a home equity loan, your lender looks at your income and affordability, but the amount of equity in your house is a major deciding factor. The total combined value of your mortgages (including your first mortgage and home equity loan) usually can't be above about 80% to 90% of your home's value. So, if you have a house worth $400,000 and you owe $300,000 on it, the maximum you might be able to borrow is around $20,000 to $60,000.

4. The interest rate

Home equity loans usually have a lower interest rate than personal loans. As of December 2023, the rates are somewhere around the 8.95% range depending on lender and borrower qualifications. The average personal loan rate is 12.17%.

You're almost always going to pay lower financing charges with a home equity loan since it's a secured loan. Your house guarantees the lender can be paid back -- if you stop making payments, the lender can take possession of your home (more on this below). With this guarantee, the lender takes on less risk than with an unsecured personal loan.

5. The risk to your home

Finally, it's important to consider the risk to your home. Whenever you get any kind of mortgage loan, the lender has a legal interest in your house. If you don't pay, the lender can foreclose. As a result, the risk of losing your house is much greater with a home equity loan.

You should carefully consider these big differences when deciding what kind of loan is right for you. If you want a quick, simple, lower-risk loan without upfront costs, a personal loan is a good choice. If you have lots of equity in your house, can qualify for an affordable interest rate, and don't mind jumping through extra hoops, you may decide to opt for a home equity loan instead.